THE MORALS OF THE TAX TALES: DON'T BE AN APRIL FOOL
Michigan Credit Union League - Your Money Matters
By now, you should have received your W-2s, state and federal tax forms and other "Important Tax Information Enclosed" documents. It's now time to do something with all those important papers.
But, if someone you know is thinking about trying to pull a fast one on the IRS this year, tell them to think again. In these days of high-tech computer links, the IRS claims that it can cross-match more than 90 percent of a taxpayer's income against documentation it receives from various sources. If a problem does arise, the IRS can choose from hundreds of civil penalties to throw at the culprit.
To some, trying to file inaccurate or fraudulent deductions may seem appealing. It may seem that the chance of being audited isn't great enough to pass up a larger refund. However, if you get caught, the price you pay is a lot higher than any amount you might receive in an extra refund.
The Michigan Association of Certified Public Accountants (MACPA) has gathered a few tax tales worth noting. These stories will help you stay current on the tax laws and keep you out of trouble with the IRS.
COMIC BOOK EXPENSES NO LAUGHING MATTER
A university math professor agreed to serve as an advisor to an after-school comic book club, although he was not required to do so. Over the course of a three-year period, he purchased more than 16,000 comic books which he claimed were required for him to perform his duties for the book club. He racked up $30,000 in expenses and then claimed the expenses as an unreimbursed employee business expense. The IRS disallowed the deductions, stating the after-school activities are not part of his job. The Tax Court sided with the IRS, stating that the expenses were not reasonable.
Generally, unreimbursed employee business expenses may qualify for a deduction if they are incurred because they are required by or for the convenience of your employer. They are considered miscellaneous itemized expenses, which are deductible to the extent that the total of such expenses exceeds 2 percent of your adjusted gross income.
TAXPAYER SEARCHES FOR POT OF GOLD
Believing he could strike it rich quick, one taxpayer spent more than $200,000 in search of gold in abandoned mines and treasures on sunken Spanish galleons. Unfortunately, he found only a few gold coins. However, he decided to turn to the IRS for a tax deduction, claiming $200,000 in losses. The IRS denied the deduction, claiming that his search for treasure was a hobby and not a business. However, the Tax Court disagreed and ruled in the taxpayer's favor, stating that, despite his losses, the taxpayer had a valid profit motive.
The question of whether an activity is a hobby or sideline business arises when loses are incurred. To prove that the losses stem from a business, you generally must show a profit in at least three of the last five years or demonstrate a profit motive.
RACING TO A TAX DEDUCTION
A business owner who enjoyed racing cars decided to have his company sponsor his driving. He then deducted the cost of racing as a business expense. Although the IRS denied the deduction, saying the racing was a hobby, the Tax Court overruled the IRS's decision, pointing out that the race sponsorship resulted in good publicity for the business.
Advertising is considered a deductible business expense. Keeping accurate records, and demonstrating the results of advertising, can help substantiate such deductions.
NO HALF-BAKED DEDUCTION
One baker donated bread that was four days old to local charities and claimed a charitable deduction based on the bread's full retail value. Although the IRS challenged the deduction, saying that four-day-old bread wasn't worth as much as newly baked bread, the Tax Court overruled the IRS. Since the four-day-old bread was regularly sold at the full retail price and had no expiration date, there was no reason to conclude that the bread given to the charity on the fifth day couldn't have been sold for the same price. The deduction was thus allowed.
Charitable contributions of property are limited to the fair market value of the property - that is, what a willing buyer would pay to a willing seller for the item.
LAST-MINUTE GIFT GIVING THAT COUNTS
One taxpayer made large year-end gifts in the form of a check to his son and daughter-in-law which they then deposited in their credit union on December 31. However, the checks didn't clear the credit union until January 2. Large gifts were then made the second year. The IRS said both gifts were made in the same year and that gift tax was owed because the combined amounts of the gifts exceeded the annual gift-tax exemption. However, the court of appeals said that no tax was due because the gifts were deemed completed in the year in which the checks were actually deposited.
Annual gifts in excess of $10,000 per donee are subject to gift tax. To be certain that your gift qualifies for the exemption, make sure that the transaction is completed in the year in which you plan to claim the exemption.
Hopefully, the morals of these tax tales will help you keep out of trouble with the IRS. Always remember, the best method to use when filing your income taxes is simply to file them as accurately and honestly as you can.